Colleges maintain a big lie: Nonprofits they are not

College sports is big business. Bloomberg estimates annual industry revenue from tickets, television and merchandising at over $15 billion. If universities are going to compensate athletes for supporting multimillion-dollar sports programs, the idea that these organizations are tax-exempt nonprofits becomes absurd.

To pay, or not to pay: That is the question – not for Hamlet, but the NCAA. When former UCLA basketball star Ed O’Bannon saw his computer-generated image in a video game several years ago, the answer was clear enough to him: Pay me. This month, a federal judge agreed, declaring that the NCAA’s prohibition on direct payments to athletes is a violation of anti-trust law.

Starting in 2016, colleges can provide so-called student-athletes with direct benefits including personal trust fund payments. The NCAA can limit the total. But according to the court, the cap on payments cannot be lower than $5,000 a year. Those sounds you hear are cash registers opening in college recruiting offices across America.

We’re all familiar with the perils of a “slippery slope” that leads incrementally, but inevitably, to a place we’d rather not be. The decision in the O’Bannon case represents not so much a step onto that slope as a leap – a good, old-fashioned, Pete Rose-style, head-first-into-third-base belly flop. The ultimate destination isn’t home plate but a date with the Internal Revenue Service.

College sports is big business. Bloomberg estimates annual industry revenue from tickets, television and merchandising at over $15 billion. But as analysts and lawyers consider the court decision, their emphasis remains on the students, the sports programs and the dying notion of amateur status.

Lost in the chatter is this: If universities are going to compensate athletes for supporting multimillion-dollar sports programs, the idea that these organizations are tax-exempt nonprofits becomes absurd.

There are more than two dozen ways to claim status as a nonprofit – and, by extension, as tax-exempt. Colleges and universities typically cite their educational mission. Some, like the University of Texas, are actually incorporated as political units within their state. While educational institutions provide unquestionable value to students and society, nowhere is it written that nonprofit status conveys a license to engage in unlimited commercial activity tax-free. In fact, the concept of tax-exempt status was originally intended to apply to organizations operating solely for charitable, religious or educational purposes.

Today, at least a dozen schools generate $100 million per year from sports programs – a figure that approaches 10 percent of the operating budget for powerhouses like Auburn and Louisville. Paying athletes strips away whatever pretense remains of that educational mission, at least for a significant portion of their student body and revenue base. As payments flow and revenues grow, the school administrators, NCAA officials and IRS bureaucrats who have colluded to maintain that pretense will have little left to argue.

It’s especially hard to hide behind the educational mission when the highest paid employee at your school is a coach. Last year, 25 college football coaches took home more than $2.5 million each. At Alabama, Coach Nick Saban’s salary topped $5 million. The issue is not whether they are worth it or whether the schools are justified in paying that freight, but whether the business entity paying such rich contracts should operate tax-free.

The eye-popping numbers on ESPN’s recent deal for a Southeast Conference Sports Network lay bare the economics at stake. With $800 million in profits, each of the 14 schools can expect yearly distributions of roughly $50 million tax-free. In pursuit of this bonanza, Tennessee built a $10 million television studio; Auburn spent $5 million on a control room. Paying coaches and athletes, selling tickets and television rights, licensing merchandise and fight-song ringtones. Sounds like a business to me.

Those who argue that sports profits keep down tuition costs are mistaken in two ways. First, it’s unfair to allow a handful of schools to subsidize their students at the expense of taxpayers across the country. Second, if anything, the surpluses allow the schools to operate with less financial discipline – and less focus on education – than should be the case for true nonprofits.

To be sure, schools won’t be required to pay athletes, but dozens of top-tier schools will happily pay handsomely. Others will be unable to compete with the big-money sports programs. But by recognizing this big business for what it is, we make their choice simpler: Exercise restraint and focus on education or start paying taxes.

For years, advocates of paying college athletes have been pointing to a “big lie” – the idea that top college performers are amateurs. In truth, amateur status became obsolete years ago (See: Olympics). The far bigger lie is that these major sports schools are nonprofit institutions. To thine own self be true, Shakespeare urges.

Or more simply: Pay up. You’ll feel better.

New York Times News Service

John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Boston Globe.